The Economist points to the research of Hendrik Bessembinder who finds that most of the historic stock market gains in the US can be traced to a handful of stocks. He finds,
Of the nearly 26,000 common stocks that have appeared on Centre for Research in Security Prices (CRSP) monthly stock return database from 1926 to 2016, less than half generated a positive lifetime buy-and-hold return (inclusive of reinvested dividends) and only 42.6% have a lifetime buy-and-hold return greater than the one-month Treasury bill over the same time interval... When stated in terms of lifetime dollar wealth creation to shareholders in aggregate, approximately one-third of 1% of the firms that issued common stocks contained in the CRSP database account for half of the net stock market gains, and slightly more than 4% of the firms account for all of the net stock market gains. The other 96% of firms that issued stock collectively matched one-month Treasury bill returns over their lifetimes.
The graphic below shows the cumulative percentage of net US stock market wealth creation in the 1926-2016 period when the 25332 companies in the CRSP database are sorted from largest to smallest wealth creators.
The next graphic looks at the cumulative percentage wealth creation by the 1100 wealth creating companies (the remaining companies lose money).This draws attention to the importance of portfolio diversification, and in particular of increasing the likelihood of being able to capture atleast some of the likely winners,
The results presented here reaffirm the importance of portfolio diversification, particularly for those investors who view performance in terms of the mean and variance of portfolio returns. In addition to the points made in a typical textbook analysis, the results here focus attention on the possibility that poorly diversified portfolios will underperform because they omit the relatively few stocks that generate large positive returns. Actively managed portfolios tend to be concentrated. For example, Kacperczyk, Sialm, and Zheng (2005) show that actively managed equity mutual funds hold a median of only 65 stocks. The results therefore help to explain why active portfolio strategies most often underperform benchmarks (such as the S&P 500 return) that are constructed as average returns across securities available for investment. Underperformance rates that exceed 50% are often attributed to transaction costs, fees, and/or behavioral biases that amount to a sort of negative skill. The results here show that underperformance can be anticipated more often than not for active managers with poorly diversified portfolios, even in the absence of costs, fees, or systematic behavioral biases.